Tesco Heads for Best Month Since 2008 as HSBC Joins Buy Camp

Tesco Plc gained in early London trading after HSBC analyst Dave McCarthy raised his recommendation on the U.K.’s biggest grocer, saying that management is taking the right steps for long-term recovery.

The shares rose as much as 3.6 percent to 197.95 pence, putting them on course for their best month since December 2008. They’re still down 41 percent this year, held back by slumping sales and a profit overstatement that led to the suspension of eight senior managers.

“Many challenges remain, but we believe in the short- and immediate-term the market will anticipate recovery before it happens,” McCarthy, HSBC’s head of consumer retail research, said in a note, raising his rating on Tesco to overweight. Important issues such as the grocer’s accounting problems, which are the subject of a U.K. Serious Fraud Office investigation, “have been addressed,” McCarthy wrote.

Tesco was up 1.6 percent at 194.2 pence as of 9:18 a.m.

The upgrade by HSBC means there are now as many analysts with a buy or equivalent recommendation on Tesco as there are that have a sell rating. In addition to the six on each side of the fence, 14 analysts have a hold recommendation on the stock, according to data compiled by Bloomberg.

HSBC joins Sanford C. Bernstein in turning more positive on Tesco, whose new Chief Executive Officer Dave Lewis is considering ways to win back U.K. shoppers, particularly in the face of increased competition from discounters Aldi and Lidl.

Bernstein said in a Nov. 10 note that Lewis could take several options that would disprove the “current doomsday scenarios” implied by Tesco’s stock valuation. Those include a partial sale of assets in Thailand or South Korea, he wrote.

A full turnaround may take five to 10 years, HSBC’s McCarthy said. Tesco’s strategy “must be to sell Sainsbury quality at Asda prices,” McCarthy said, referring to the grocer’s two biggest U.K. competitors. A 3 billion-pound ($4.7 billion) investment to cut prices, improve food quality and correct understaffing in stores should be made, McCarthy wrote.

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